TOWARDS EXPANDING THE FRONTIER OF MICROFINANCE SERVICES IN NEPAL

1. TOWARDS EXPANDING THE FRONTIER OF MICROFINANCE SERVICES IN NEPAL Nara Hari Dhakal UNDP NEPAL

2. Content of Presentation • Context • Objective of the study, • Relevance to conference and theme • Hypotheses and key research questions • Methodology • Major findings • Key conclusions, • Key policy implications, • Areas for further study

3. Context • Geographical diversity and differential potentialities made the provision of microfinance services in remote areas difficult, • Low outreach of microfinance services in remote areas despite significant innovations in the recent decades, • Large number of poor and disadvantaged people living in remote areas are devoid of microfinance services, • Expanding the frontier of microfinance services in remote areas is yet a challenge.

4. Objective of the study • Mapping the breadth of outreach of microfinance services across different service providers, • Review the product and service delivery methodologies, cost structure, efficiency and productivity; and portfolio quality of leading microfinance services providers and • Assess comparative advantages of existing MFIs to expand the frontier of microfinance services in remote areas,

5. Relevance to conference and theme This paper address the • Supply side issues related to rural finance, • Limitations of existing service providers in achieving outreach in remote areas, • Cost structure and sustainability of existing methodologies, • Comparable advantages and dis-advantages of one institution type over another in terms of sustainability, quality and scope of products and services being offered, • Possibilities of linking various actors to achieve better outreach

6. Hypotheses and key research questions • Existing product and service delivery methodologies are not suitable to expand microfinance services in remote areas, • Cost structure of MFI deter them to expand their service in remote areas, • Commercial oriented MFIs have comparable advantages over SCCs and SFCLs in terms of sustainability, quality and scope of products and services being offered in accessible areas, while reverse is the case in remote areas, • Partnership between community based MFIs with apex and commercial oriented MFIs with informal savings credit group can expand the frontier of microfinance services,

7. Methodology • Collection of information on outreach of leading microfinance programme and institutions, • Mapping the breadth of outreach across geographical regions • Analysis of distribution of microfinance services across geographical regions. • Assess the comparative advantages of existing modalities to expand the boundaries of microfinance services in remote areas in terms of • Product and service delivery methodologies, • Outreach, • Cost structure, • Efficiency and productivity and • Portfolio quality. • Key challenges and opportunities analysis

8. Overview of Nepalese MF Sector • Both commercial oriented MFIs (FI-NGOs and MDBs) and community base MFIs (SCCs and SFCLs) coexist in Nepalese microfinance sector. • Three laws: Bank and Financial Institutions Act 2006, Act for NGOs involved in Financial Intermediation 1999 and Cooperative Act 1991 governs Nepalese microfinance sector, • Potential market = 2405,000 • Savings services = 886,000 (37%) • Loan services = 730,000 (30%)

9. Major Findings – Product and Service Delivery Methodologies • Products and services delivery methodologies of MDBs, FI-NGOs and SFCLs are best suited in more accessible areas, • SCCs modality is suitable both in accessible and remote areas, • CBs have limited role to out expansion in albeit their wider branch networks, • Markets potential and product and service delivery methodologies have implications on reaching the required number of clients per service delivery units,

10. Major Findings – Product and Service Delivery Methodologies (Contd..) • Community based MSPs (i.e. SCCs) are in comparatively better position to extend their services in remote areas compared to their commercial counterparts. • Inability to reach minimum number of clients per branches due to low population density and high poverty incidence is one the reasons for low market penetration in remote areas.

11. Major Findings – Outreach • Market penetration of • savings services is estimated at 6%, 9%, 33% and 66% in mountains, inaccessible hills, accessible hills and Tarai districts respectively and • credit services is estimated at 4%, 7%, 26% and 56% mountains, inaccessible hills, accessible hills and Tarai districts respectively • Market for microfinance services is more in mountains (89%), followed by inaccessible hills (69%), accessible hills (48%) and Tarai (39%) regions.

12. Major Findings – Outreach (Contd..) • Outreach of microfinance services is still low and market for micro and rural financial services appears to be huge, if only services could be delivered in a sustainable manner. • Ensuring access to microfinance services to people living in remote areas is yet a challenge in Nepal.

13. Major Findings – Cost Structure • Return APA is same and close to effective interest rate in case of SCGs and SCCs. • Minor variation on financial productivity exist across geographical regions, • difference between effective interest rate and return on APA is significant in case of SFCLs, MDBs and FI-NGOs. • Financial productivity is lowest in SFCLs and highest in SCCs and SCGs while MDBs and FI-NGOs are in between. • Inverse relationship between return on APA and remoteness of the area exist.

14. Major Findings – Cost Structure (Contd..) • Total operating expenses to APA ratio ranges between 5 and 7% in SCGs, while it ranges between 11 and 19% among other MFIs. • Positive co-relation exist between operating expenses ratio and geographical remoteness with high ratio in remote areas and low ratio in accessible areas. • Variation on ratios is quite high among community based service provides across geographical remoteness while such variation is relatively narrow in case of commercial service providers.

15. Major Findings – Cost Structure (Contd..) • Existing cost structures of SFCLs, MDBs and FI-NGOs deters them to expand their services in remote areas. • SCC is a sustainable model to expand microfinance services in all four geographical areas except mountains. • Innovation to reduce operating cost is a pre-requisite to expand microfinance services through SCCs in mountains and this findings remains valid among MDBs, SFCLs and FI-NGOs as well. • As expected operating self-sufficiency (OSS) is highest (300%) in SCGs and lowest (98%) in MDBs.

16. Major findings – Efficiency and Productivity • Across MFIs, FI-NGO is the most productive than other MFIs due to their local existence and unique delivery system, • There is drive to attain higher productivity among MDBs and FI-NGOs as jobs are tied to staff performance, • Borrowers to staff ratio of SCCs and SFCLs is towards a lower due to design consideration, legal framework and management factor, this requires improvement through enhanced professionalism,

17. Major Findings – Efficiency and Productivity (Contd..) • All the MFIs are efficient and capable to minimize cost of service delivery, • Across MFIs, cost per borrowers is highest in MDBs and lowest in SFCLs and FI-NGOs and SCCs in between. • SCCs/SFCLs are able to achieve higher efficiency as a result of its lower operating costs and larger loan sizes.

18. Major Findings – Portfolio Quality • SFCLs have PAR over 30 days of 10.6% - 25.6%, 13.2% in SCCs and 11.5% in FI-NGOs and 3.6% in MDBs, • As with productivity, organizational culture (zero tolerance on overdue) is also the key determinant of portfolio quality in MDB and some FI-NGOs, • Writing off delinquent loans currently remains a taboo practice among commercial MFIs covered by this study.

19. Key Conclusions – Challenges • Key microfinance actor have already reached to the frontier of microfinance market and strategy to strengthening existing service providers are using thousands of SCGs to a full potential is most fundamental to expand microfinance service in remote areas, • Policy environment • Rural economic settings • Cost structure has deterred MFIs to expand their service in remote areas,

20. Key Conclusions – Emerging Opportunities • MDBs and FI-NGOs have comparative advantage to extend their services in densely populated accessible areas while SCCs and SFCLs are better positioned to serve even in remote areas, • SCGs exist throughout Nepal and are not fully used due to lack of vision, • MDBs and FI-NGO have gradual entry into relatively inaccessible areas • Expansion of the frontier of microfinance services in remote areas requires intervention to promote and strengthen SCCs and SFCLs and properly use the potentials of existing SCGs

21. Key Conclusions • Existing product and service delivery methodologies are not efficient to expand microfinance services in remote areas, • MDBs and FI-NGOs have comparable advantages over SCCs and SFCLs in terms of sustainability, quality and scope of products and services being offered, • Better outreach requires a partnership between (i) community based and commercial oriented MFIs and (ii) commercial oriented MFIs and SCGs.

22. Key Policy Implications Expansion of the frontier of microfinance requires; • Investment on transport and communication infrastructure development • Innovation to reduce cost structure of MDBs and FI-NGOs, • Promotion and strengthening of SCCs and SFCLs, • Strengthen MDBs and FI-NGOs to use thousands of SCGs to a full potential through SHG banking,

23. Areas for Further Study • Potentials for SHGs on expanding the microfinance services, • Productivity enhancement tools to reduce the cost of commercial microfinance service providers to work in remote areas, • Mechanism to establish linkages of SHGs with commercial microfinance service providers

24. THANK YOU ………………….